This is a quick follow-on from my longer valuing BitCoin post.
The volume of BitCoin transactions originating in China is simply enormous. A New York Times article referenced in my prior post contains the following infographic (this is a little dated):
Note the vast difference in volumes between China, the US and Europe. Why do the Chinese love BitCoin so much?
I want to link this to an older macroeconomic analysis from John Hempton. In a post from several years ago, Hempton asserted that China is a kleptocracy made possible by state-owned enterprises’ ability to fund themselves at negative real interest rates. In a follow-on post Hempton theorized that this means there should also be significant retail investor demand for gold in China.
In my kleptocracy post I described how the range of investments available to the median Chinese family is limited. They can’t take their money offshore (unless they are rich enough to afford casino junkets). The local stock market is rigged. There is no worthwhile mutual fund market. They can own see-through apartments. But their main saving mechanism is bank accounts and life insurance contracts (life insurance being a bank account proxy).
Rates are regulated – low. Inflation is high and ex-ante the return to Chinese savers is negative.
Despite negative real returns Chinese save in huge quantity. This may be because of the “four grandparent policy” as described in the kleptocracy post or because of gender imbalance (as described in the follow up post).
Whatever: in China we have huge quantities of savings at ex-ante negative real returns in some sense compelled by local social and political structures.
This pool of savings (part of what Ben Bernanke once described as the “excess of global savings”) has global implications – and these will be explored in a forthcoming posts.
But here I state the obvious.
If you were forced to save huge amounts of money at negative real rates of return wouldn’t gold look attractive?
And, I would add, wouldn’t BitCoins now look even more attractive than gold? If you are an average Chinese household hoarding gold, that strikes me as a tremendous undertaking. You would have to find a way to store the gold, secure the gold — on top of that it is not particularly easy to transact in gold.
BitCoin presents a convenient solution to these issues. Who cares if the Chinese government officially bans cryptocurrency exchanges? For BitCoin at least the whole point is to own an asset that is independent of conventional monetary policy (and, one might add, conventional capital controls). The storage costs strike me as much, much lower. In Cuba people circulated banned American media on flash drives. In China, hoarding BitCoins would be similarly straightforward.
Recall that when Jamie Dimon let loose with his tirade against BitCoin, he also said the following:
The only good argument I’ve ever heard … is that if you were in Venezuela or Ecuador or North Korea.. or if you were a drug dealer, a murderer, stuff like that, you are better off dealing in bitcoin than in US dollars, you are better off bypassing the system of your country even if what I just said is true. There may be a market for that but it’s a limited market.
My question: should China also be on that list?